MNI BOE WATCH: Data-Dependent Stance Ups Chances Of 25BP Hike

The Bank of England looks certain to hike again in August, with analysts split over the size of the move but with a 25-basis-point rise in Bank Rate apparently more consistent with its data- dependent guidance than a larger 50bp move as inflation and activity come in roughly in line with May forecasts.

While the Monetary Policy Committee’s previous statement indicated only that “further tightening in monetary policy would be required” in the case of more inflationary pressures and provided no steer as to the potential size of the next move, a second consecutive 50bp hike following June’s surprise increase to 5% would risk driving peak rate expectations back up above 6%. This would also risk pushing mortgage rates higher again, adding to pressures on consumption.

June’s headline CPI inflation of 7.9% was bang in line with the MPC’s May forecast while labour market data were mixed, with strong wage growth accompanied by signs of weakening employment.

CHANGES TO QT

The Bank’s last projections showed an undershoot of the 2% inflation target two and three years ahead on the modal, or most likely, forecast, at 1.1% and 1.2% respectively, though the MPC, which has publicly cast doubt on its own models, opted to add an upside skew of 0.8 percentage point to inflation at the end of the forecast horizon, bringing it back to target. (See MNI POLICY: BOE Hikes Whilst Seeking New Inflation Model)

Given the BOE’s doubts over its forecasting, the signal from any changes to these on Thursday will be muted. The Bank said on Friday that former Federal Reserve chair Ben Bernanke will oversee an investigation into its projections.

The MPC also has to decide before October whether to step up the pace of quantitative tightening, with Deputy Governor Dave Ramsden, responsible for the Bank’s balance sheet, in favour of somewhat faster gilt sales. The announcement last August of this year’s GBP80 billion reduction in gilt holdings, including GBP40 billion in active gilt sales, came as the Bank was working out its procedures and this time it may delay publishing the details until September. (See MNI POLICY: BOE To Speed Up QT, Detail Likely In Sept)